Calculate an appropriate absorption rate, Cost Accounting

Three of the cost items that are included in the production overhead for a factory for a period are:

Machine maintenance labour

$33,600

Power

$26,000

Rent and rates

$39,800

Production overheads are currently absorbed using a single factory-wide rate.

It has been suggested that a separate overhead absorption rate should be calculated for each of the three groups of machines in the factory. The following additional budgeted data has been collected for the period:

Machine Group

Total

MG1

MG2

MG3

Floor area (m2)

1,600

1,400

1,000

4,000

Machine values (

000)

320

250

230

800

Kilowatt hours ('000)

220

110

110

440

Machine maintenance (labour hours)

600

400

600

1,600

Number of indirect workers

4

4

2

10

Machine hours

8,200

5,600

4,900

18,700

Required

(b) Briefly explain one reason why a separate overhead absorption rate for each machine group would be preferable to a single factory-wide rate.

(c) Apportion each of the three items of budgeted overhead cost (machine maintenance labour, power and rent and rates) to the three machine groups.

The totals of all budgeted production overhead cost items, allocated and apportioned to the three machine groups, are as follows:

MG1

$129,560

MG2

$107,520

MG3

$119,070

Required

(c) Calculate an appropriate absorption rate for each machine group.

(d) Calculate the production overhead that would be charged to job 121which requires five hours on MG1 machines two hours on MG2 machines and three hours on MG3 machines.